Private capital fundraising driving record levels of undeployed capital

SYDNEY,May 11,2023 -- Jointly released by the Australian Investment Council and Preqin,the Australian Private Capital Market Overview: Preqin and Australian Investment Council Yearbook 2023 tracks activity in the Australian private capital industry.

It is based on data contained in the Preqin Pro data platform,as well as on-the-ground information collected by both Preqin and the Australian Investment Council,and covers fundraising,investments and exits across the Australian private capital industry.

The report finds Australia's private capital market reached record assets under management (AUM) amid global macroeconomic headwinds:

$118bn in private capital AUM as of September 2022,up 21% from nine months prior ($98bn)

The combined total of AUM of private equity,venture capital and private credit ($61.7bn) now exceeds the total AUM of real assets ($56.6bn).

Aggregate fundraising across private equity and venture capital totalled $11.7bn in FY 2022

Foreign investors have grown more active in Australia over the past two decades,now accounting for 46% of active investors committing to Australian-based funds from 2018 to 2022,compared to 18% in funds up to 2002.

Australia now has 212 private capital fund signatories to the United Nations' Principles for Responsible Investment,up from 198 in 2021.

Note: all currency units are in Australian dollars unless otherwise stated.

In a sign of confidence in the Australian private capital industry,aggregate capital raised in the year to 30 June 2022 (FY22) by private equity and venture capital funds more than doubled and quadrupled compared to fundraising in the previous year. The report confirms that in FY22,private equity funds raised $9bn and venture capital raised $2.7bn.

Fund inflows were not limited to institutional funds; Australian superannuation funds in 2022 comprised 28% of all private capital investors,down from 42% in 2018,driven by the consolidation of funds that has occurred at a rapid pace. Increasingly,fundraising activity includes high-net-worth individuals,family offices,and wealth managers,all of whom are attracted by the proven benefits of diversification,hedging characteristics,and exposure to higher returns.

Funds raised in FY22 take assets under management (AUM) across private equity,venture capital,private credit,infrastructure,real estate and natural resources to a record $118bn. This underscores domestic and international investor appetite to seek returns by investing in Australian ideas,businesses,and assets. The report also confirmed there is a record amount of undeployed capital,with $37bn available for investment in Australia,up by 17% on FY21.

Private equity,venture capital and private credit account for more than 50% ($61.7bn) of that $118bn of AUM,outweighing private capital allocated to Australian infrastructure,natural resources and real estate combined ($56.6bn).

Australia's emerging private debt industry grew steadily in 2022 supported by robust deal activity and tighter lending conditions amongst traditional debt providers. As interest rate pressures remain priced into markets,private debt facilities remain an attractive funding facility for investors.

The nation's venture capital sector remained resilient despite more challenging market conditions; 338 venture capital deals were completed with an aggregate value of $5.6bn invested in 2022,seed or pre-seed deals continue to remain central to the focus of major venture capital funds.

In a sign that international investors have found Australia to be an attractive investment destination for alternative assets over the long term,foreign investment has grown considerably over the past two decades,accounting for 46% of active investors committing to Australian-based funds of vintages 2018 to 2022,compared to 18% in funds of vintages up to 2002. Among foreign investors,North America accounts for the highest proportion at 25% of all active investors.

Preqin Research Insights VP Angela Lai,said: "With LP sentiment turning cautious globally,Australia-focused private equity and venture capital fundraising surprisingly reached record highs in 2022. This was partly due to higher commitments from the country's superannuation funds,and new participation from family offices and wealth managers."

Australian Investment Council CEO,Navleen Prasad said: "It is pleasing to see such strong investor support for Australian private capital,and private equity,venture capital and private credit in particular. In a globally competitive market,Australia offers a relatively stable regulatory and legislative environment as well as access to high quality talent pools and a gateway to Asian markets.

"It is worth noting that since 30 June 2022,the global economic and market environment has become even more uncertain,and we anticipate that will have some impact on private capital investment. While Australia's economy has been relatively resilient to date,uncertainty does impact a range of investment dynamics such as the types of investments being made,and the time taken to make investment decisions.

"While there was substantial fundraising activity last year,we anticipate that activity to moderate this year and investment managers will be even more discerning as they seek opportunities to invest record levels of undeployed capital. That said,we believe that high-quality assets with strong fundamentals and robust growth prospects will continue to be attractive to investors."

Australian-focused private capital funds delivered a median net Internal Rate of Return (IRR) of 14.9%,in line with Europe,and slightly below Asia and North America. Private capital's positive returns contrast with negative returns for Australian equities (shares) and fixed income (bonds),building a strong case for alternative assets in a diversified investor portfolio.

Ms Lai added: "Australia's real assets have proven to be resilient given their ability to hedge against inflation and provide long-term risk-adjusted returns. We expect that value-added strategies will gain momentum as the commercial real estate sector adapts to new hybrid working styles and the need to retrofit buildings for sustainability purposes. At the same time,the country's natural resources and infrastructure asset classes have benefited from higher energy,food,and commodities prices in the recent years."

Australia's alternative assets industry continues to see opportunities arising from developing new technologies and infrastructure that support the energy transition. The country continues to lead its peers in APAC in ESG investing,with 212 UN PRI signatories,and its regulators have continued to scrutinize and combat greenwashing. These developments will draw responsible investors to allocate more towards assets in Australia.

Ms Prasad noted: "For Australia to remain an attractive destination for investment,remaining competitive is of paramount importance and requires constant attention,particularly where governments around the world are looking to private capital to supplement constrained public balance sheets. The right policy settings will continue to be crucial for Australia to remain competitive on the world stage as an attractive investment destination."